The UltraFICO looks at new types of factors to determine creditworthiness and is a significant shift from how credit has been evaluated in the past four decades.
In this article, I’ll discuss the critical differences between FICO and UltraFICO, and share some things you can do now to prepare for this shift.
What is a FICO score?
Your FICO score is what determines your creditworthiness. It’s a three-digit number, initially created by Fair Isaac Corporation in the 80s that evaluates many different factors from your credit report. Those factors are summarized by this number, which gives creditors a quick look at your likelihood of paying back your debts.
For example, when you go to apply for a mortgage, the lender will pull your credit report. They’ll review your credit report in detail, but they’ll also look at your credit score (FICO score) to quickly determine the rate and terms they’ll offer you.
Your FICO score is composed of five primary factors, each with different weights:
Your payment history
This accounts for 35 percent of your overall FICO score and is determined by how often you pay your debt on time. If you’ve missed several mortgage payments, for instance, it’ll be accounted for here.
The amounts you owe
This accounts for 30 percent of your overall score, and it pulls in the total amount of debt you have in your name. This will include things like credit cards, car loans, mortgages, and any other debt showing on your credit report.
The length of your credit history
This accounts for 15 percent of your FICO score and is determined by taking the average period of your credit history. For example, if you only have one credit account that you opened three years ago, the average length of credit history would be three years.
I you have one account you opened three years ago and one you opened seven years ago, the average would be five years (7 + 3 = 10; 10/2 = 5). That’s a crude example but is essentially how your length of history is determined, only it factors in all the accounts on your credit report.
Your credit mix
This is a small factor, accounting for 10 percent of your overall FICO score and is evaluated by the variety of credit you have in your file. For example, if you have only credit cards, it would be hard to determine the likelihood of you paying back a mortgage loan. Creditors like to see a nice mix of credit on your file, so this is included in your score.
New credit you’ve applied for
This accounts for the final 10 percent of your FICO score and is pulled from the amount of new credit you’re applying for. Each time you apply for something like a credit card or a car loan, it’s considered a hard pull on your credit and will impact your credit score. The less often you apply for new credit, the better.
What makes the UltraFICO different?
Fair Isaac Corporation has been working for a few years on a new type of FICO score that would change the game for many people looking to apply for credit. This new UltraFICO is different from the original FICO score because it takes into account how a consumer manages the cash they have in their checking, savings, and money market accounts.
This is very different than how the FICO score is determining—which is solely based on how you’ve managed your debt in the past. This new scoring system, set to roll out in early 2019, will factor in balances and trends in your cash-based accounts.
How will the UltraFICO score help credit users?
It will help those with no credit history
By looking at cash balances, the UltraFICO will help many people who otherwise didn’t have, or were working on building up credit. With a traditional FICO score, you’d need to get something like a secured credit card and use it to build credit. That was how it was always done. If you didn’t have credit, you couldn’t build credit. In a way, it seems counter-intuitive.
The UltraFICO score will give those who have no credit or low credit the ability to build it by showing they can manage their cash accounts. If you look at it from a lender’s perspective, it actually makes sense.
It will tell your whole credit story
Evaluating someone’s creditworthiness based on how often they make payments on time is excellent, but it only tells part of the story. What if they are living paycheck to paycheck and the likelihood of default is high if they were ever to lose their job? A traditional FICO score could never evaluate this.
The UltraFICO will look at balances and usage in cash accounts, so effectively it could evaluate the likelihood of repayment based on how you manage your cash. For example, do you have an average balance of $20,000 in your checking account or $200? Do you drain your savings account each month to pay your bills, or is that balance increasing over time? To me, those factors seem to be decent evaluators of someone’s creditworthiness.
This is why Fair Isaac has been developing the UltraFICO score—so we have not only a new way of evaluating someone’s creditworthiness, but a new method for someone to build their creditworthiness up.
How else can you improve your credit?
There are several ways you can go about improving your credit score before the new UltraFICO score gets put in place:
Make debt payments on time
This is absolutely critical. As you can see above, it accounts for 35 percent of your traditional FICO score. There is a difference in how late payments are determined, though. For example, if you’re a day or two late on a credit card payment, most likely your credit card company will just slap you with a fee and potentially increase your rate.
In most cases (you’d want to verify this with your creditor) they won’t report the late payment until it reaches 15-30 days past due. Now, this isn’t to say you should test the rules and wait until you’re 14 days late. Focus on making all of your payments on time, by the due date, with things such as credit cards, car loans, mortgages, and any other type of loan.
Apply for, and use credit
With the traditional FICO score, you can’t build credit without getting credit. This means that you need a credit card or something that can show you know how to manage your credit accounts. If you have no credit or your credit is terrible, an excellent place to start is a secured credit card. This is a credit card that banks will give you when you provide a security deposit.
So, for example, if you apply for a secured card and are approved for a $300 credit line, the bank will take a $300 security deposit in exchange for the credit card.
This is protection for them in case you default on the credit card and don’t pay it back—they have your security deposit. It’s a great way to start building credit—just make sure you’re making the payments on time.
Our favorite secured cards are Discover it® Secured and the Capital One® Secured Mastercard®.
Don’t go crazy with applying for new credit
Each time you open a new credit account you’re getting a hard pull on your credit report. This means someone is checking your credit score, which will negatively impact your credit score. As I said above, you should apply for, and use credit, but do it within reason. Don’t go asking for 10 different credit cards, thinking it will help. It won’t. All you need is one or two accounts to get started.
Keep your utilization low
Your debt utilization is the ratio of how much debt you have versus how much you have available. For example, if you have a credit card with a $1,000 limit and you have a $300 balance, your utilization is 30 percent (300/1,000).
Your utilization is taken across all of your accounts, though, not necessarily on an account-by-account basis. The general rule of thumb is to keep your utilization below 25 or 30 percent. In my opinion, you should keep it well below 20 percent.
Build up your cash stash
This is a new one, based on the UltraFICO implementation. We don’t know exactly how it’s going to all work out yet, but we do know that UltraFICO will look at the average balances and how you use your cash accounts. You can start “building credit” now by increasing your cash savings or money market balances and doing your best to build up a solid average balance in your checking. This means not draining your checking account each month if you can manage it.
A great tool to use for building up your cash stash is YNAB (You Need a Budget). One of the things they focus on is building up your “age of money”—so by using a budget, you can age your money and keep a higher cash balance in your accounts. This has worked wonders for me.
Also, check out high-yield savings (and checking) accounts that make you money just by having your money in the right bank. We like the Discover Cashback Debit Account, or any of the Chime Bank accounts.
The UltraFICO score is new, and while we don’t know all of the details or how it will indeed impact people’s credit scores, we know that significant change is coming. And we know that it’s focused primarily on cash.
For now, we strongly recommend getting your traditional FICO score in check by doing some of the things I suggested above, but looking ahead, think about how you’re building up your cash accounts (checking, saving, and money market) to show your creditworthiness. While this new score can help those who are rebuilding or don’t have credit, we also think it can accelerate the scores of those who are already managing their credit and cash well.
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